For nonprofit organizations, the perennial task of crafting a realistic budget has become anything but routine. Between fluctuating revenue streams, shifting demographics and increasingly rigorous expectations from board members and donors, building a workable financial model poses an ongoing challenge for most leaders. Ease the budgeting process with these tips for a more strategic approach to financial management.
Evaluate different budget models
The ground is shifting rapidly under nonprofit organizations; funding is unpredictable, and donor contributions fluctuate, creating financial uncertainty. Meanwhile, shifting community needs and evolving program demands can further strain budgets. In such a dynamic environment, it’s not surprising that the traditional, one-year incremental style of budgeting no longer performs well.
Consider alternatives like a financial model based on performance, activities, or incentives, or combine different elements of each style to match your organization’s current needs. You can improve budget performance without abandoning your current style of financial modeling; just tweak where it makes sense and incorporate changes where a new approach could benefit the organization.
Take the long view
Whichever financial model you choose, it’s important to view your 12-month budget in the context of the bigger picture.
- How do current budgetary priorities align with long-term strategic growth initiatives?
- Which long-term trends are helping to shape this year’s budget?
- What steps are you taking to ensure actual revenue closely approximates projections for the period?
Understanding how this year’s budget fits into the big picture helps you avoid surprises and adopt a fiscally sustainable mindset as you plan for the future, both short- and long-term.
Communicate priorities and expectations
Every nonprofit needs to define clear performance metrics for its programs, departments, and overall operations. Are you focusing on quantitative or qualitative results, such as reaching more beneficiaries or creating a deeper impact? More community events or stronger long-term outcomes for those you serve?
Also, consider the level of autonomy that individual programs, departments, or initiatives have in making decisions about spending and fundraising activities. If funding is allocated based on performance goals, each team must clearly understand what success looks like and how they are expected to achieve their intended impact.
Support your position
You’ll also need to be prepared to explain the “why” behind budgetary decisions that may not be immediately obvious. Are you consistently directing financial resources to programs and initiatives that generate the most funding and community support? If not, why? Nonprofits often have strong reasons for allocating resources in ways that don’t directly align with revenue generation. However, it’s essential for leaders to understand and clearly communicate those decisions.
Determine drivers of success
Nobody wants to invest in areas that aren’t delivering strong results, but is the solution to cut funding or increase it? Decisions about whether to scale back or reinvest in underperforming programs aren’t always straightforward. The key is to identify the root cause of poor performance. If additional resources could drive meaningful improvements, it may be wise to invest more, especially if the program serves a critical need or is highly valued by donors and the community.
Look closely at costs
A detailed understanding of costs is crucial to inform budgeting decisions. Granular knowledge of the expenses associated with each area helps you compare cost-to-revenue ratios across different programs and activities for more strategic funding decisions. In addition, the more you understand about expenses, the more opportunities you’ll have to discover ways to cut costs — and perhaps find new ways to generate revenue, as well.
Dive deep into your data
Data automation gives nonprofits unprecedented visibility into their financial position, often in real time or close to it. While transitioning from spreadsheets to advanced data management systems can feel overwhelming, it’s a game-changer.
The enhanced visibility boosts engagement and empowers leaders as well as individual programs to act in a meaningful time frame. Organization leaders can flag anomalies and identify trends when they happen, so you can adjust forecasts and correct course during the current period. You’ll also save countless staff hours for collecting and tracking the data that underlie your financial model, letting you maintain a consistent view of revenue and expenses across various operational units with far lower time investment.
Build a financial model that works for your organization
Your budget is more than a blueprint of spending and revenue goals — it’s a roadmap that can help you thrive in today’s high-pressure environment. Contact the experienced nonprofit advisors at Mauldin & Jenkins for assistance in crafting a financial model that helps you navigate challenges, avoid common pitfalls and achieve your objectives.
